MANAGING ERISA FIDUCIARY LIABILITY IN PARTICIPANT-DIRECTED PLANS

By Sheldon M. Geller, Esq., Geller & Wind, Ltd.

A retirement plan that provides for an individual account for each participant can be established to qualify as a section 404(c) plan, allowing participants and beneficiaries an opportunity to control the investment of assets in their accounts. Where a participant or beneficiary in fact exercises this control, fiduciaries are shielded from liability for losses that directly result from the participant's or beneficiary's exercise of control.

An employer needs to give the participant 1) the opportunity to choose from a broad range of investment alternatives, 2) the opportunity to give investment instructions with the appropriate frequency, and 3) sufficient information to make informed investment decisions.

Permissive Safe Harbor

The Employee Retirement Income Security Act (ERISA) of 1974, as amended, does not mandate that pension plans comply with the section 404(c) requirements. Rather, these rules provide employers and other fiduciaries with an opportunity for plan participants and beneficiaries to exercise control over the assets in their plan accounts and to protect plan fiduciaries from liability for certain responsibilities.

It should be noted, however, that fiduciaries must still fulfill certain responsibilities even when participants and beneficiaries exercise control over the assets in their accounts. Furthermore, fiduciaries must provide notice and meet other requirements for the participants and beneficiaries to be considered to have exercised control.

Fiduciary Responsibility

A fiduciary has no obligation under ERISA to provide investment advice to a participant or beneficiary under a section 404(c) plan. But the section 404(c) rules relieve fiduciaries of liability only with respect to participants' and beneficiaries' directions to make particular investments. Accordingly, fiduciaries must continue, subject to liability for failure, to select investment alternatives prudently, to disseminate information to participants and beneficiaries, to monitor the performance of the various investment vehicles and the market for each investment alternative, and to carry out participants' and beneficiaries' section 404(c) investment instructions prudently.

The statutory safe harbor under ERISA section 404(c) is expected to be taken into account by the courts in determining whether employers and other fiduciaries have met their fiduciary responsibility. The Department of Labor's (DOL) view of plan sponsor liability is more expansive than the courts' view. Even if a plan sponsor complies with all of the 404(c) regulatory provisions, the DOL has taken the position that the plan sponsor retains liability for choosing and monitoring the investment options in the plan. The plan sponsor must be prudent in making those investment fund choices.

Fiduciary Review

Plan sponsors need to actively manage the risk associated with participant-directed plan asset investment by conducting, at a minimum, annual fiduciary reviews and adopting a written investment policy statement evidencing prudent decisions in selecting and retaining either a type of investment option or a particular fund.

It is critical for a plan sponsor to establish procedures with a view toward satisfying their fiduciary responsibility. Plan sponsors should also review their plan fees, as part of the analysis of sponsor prudence.

Participant Education

The 404(c) regulations do not require participant education. Plan sponsors have been encouraged to provide general investment education now that the DOL has given guidance on how to provide investment education without creating fiduciary liability for investment advice.

Plan sponsors need to increase their educational efforts and might want to retain an outside investment advisory firm to assume responsibility for its advice. Most defined contribution plans, including 401(k) plans, comply with ERISA section 404(c). Many pension lawyers have suggested that plan sponsors should not provide investment advice inasmuch as 404(c) was no guarantee of a sufficient defense against a participant's claim for damages. Certainly, most plan sponsors have gone beyond the 404(c) minimum requirements in order to protect plan fiduciaries from the liability associated with the selection of an investment manager and to monitor the performance of the manager.

Investment Advice

The rendering of investment advice may raise issues under the Investment Advisors Act of 1940. While it is unlawful under the act for a person to be an investment advisor without registering with the SEC, providing a description of the investment alternatives available under the plan is, in all likelihood, not investment advice.

However, it is possible that in certain circumstances the provision of certain information, such as information regarding investment strategies or specific and individualized advice to participants or beneficiaries, may make the employer or plan fiduciary an investment advisor subject to registration and other requirements.

Employers should avoid providing individualized advice or assistance to plan participants and beneficiaries with regard to the selection of investment vehicles. Employers not retaining a registered investment adviser should consider adding a disclaimer to the provided materials stating that the information is not intended to be specific investment advice and that participants are urged to seek advice from their own investment consultant.

Managing Fiduciary Responsibility

Trustees and administrators need to understand their fiduciary responsibility requirements in order to carry them out in the plan's best interests, and in a manner that will not expose them to personal liability. Plan sponsors should seriously consider retaining ERISA counsel and using investment advisors to help exercise their fiduciary responsibilities.

Plan sponsors need to establish guidelines for investment policy, participant education, and legal compliance. Although ERISA expressly permits trustees and other fiduciaries to appoint investment managers, plan fiduciaries have sole responsibility for monitoring plan operation. ERISA allows a plan to purchase liability insurance to protect plan fiduciaries so long as these fiduciaries remain accountable to plan participants. The enforcement mechanism of ERISA provides participants and beneficiaries (as well as the Secretary of Labor) with standing to sue plan fiduciaries for damages. *

Editors:
Sheldon M. Geller, Esq.
Geller & Wind, Ltd.